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Most EU and non-EU countries have codified the arm’s length principle and local documentation requirements

In the Netherlands, the transfer pricing documentation requirements are codified as from January 1, 2003 in article 8b of the Corporate Income Tax Act (‘CITA’)

Potential reversal of the burden of proof and (general tax) penalties, in case the Dutch tax authorities (‘DTA’) request documentation and it is not submitted in time

No specific transfer pricing penalties. General tax penalties (up to 100 percent) may apply in case of an intentional act (e.g. the taxpayer took a non-defendable standpoint) leading to the underpayment of taxes

Submission deadline is within 30 days of request; this may be extended by the DTA to three months, depending on the complexity of the case

The contractual allocation of risk between associated enterprises is, however, respected only to the extent that it has economic substance;

Parties’ conduct should generally be taken as the best evidence concerning the true allocation of risk;

Where reliable data evidence is available of a similar allocation of risk in contracts between comparably situated independent parties, then the contractual risk allocation is regarded as arm’s length;

Where no comparables exist to support a contractual allocation of risk between related parties, it becomes necessary to determine whether that allocation of risk is one that might be expected to have been agreed between independent parties in similar circumstances;

One factor that can assist in this determination is the examination of which party(ies) has (have) “control” over the risk.

profit / loss potential is not an asset in itself, but a potential which is carried by some rights or other assets;

Whether a transfer of profit / loss potential is an arm’s length transaction depends on a number of factors, including the options that would have been realistically available to the transferor and transferee at arm’s length;

where at arm’s length the restructured entity would be entitled to an indemnification there should be no presumption that all contract terminations or substantial renegotiations give rise to a right to indemnification at arm’s length;

Relevant circumstances are whether the arrangement that is terminated, non-renewed or substantially renegotiated is formalised in writing and provides for an indemnification clause;

arm’s length principle and the TP Guidelines do not and should not apply differently to post-restructuring transactions as opposed to transactions that were structured as such from the beginning;

For this reason, it is essential in business restructuring cases that a comparability (including functional) analysis be performed both for the pre-restructuring and for the post-restructuring arrangements and that the actual changes that took place upon the restructuring be documented;

While such before-and-after comparisons would not suffice to support a transfer pricing adjustment in the face of the requirement posed by Article 9 of the Model Tax Convention for a comparison to be made with uncontrolled transactions, they could play a role in understanding the restructuring itself and could be part of a before-and-after comparability analysis to understand the value drivers and the changes that accounted for the changes in the allocation of profits amongst the parties.

Discusses notions in relation to the exceptional circumstances where a tax administration may consider not recognising a transaction or structure adopted by a taxpayer;

Non recognition applies where there is a dispute about the fundamental nature of the transaction being examined;

Recognition does not restrict a tax administration’s ability to adjust the price or other conditions of a controlled transaction in situations where there is no dispute about the nature of the transaction but where such price or conditions are not arm’s length according to guidance provided in other parts of the TP Guidelines;

Non-recognition of transactions is not the norm but an exception to the general principle. Tax administrations should not ordinarily interfere with the business decisions of a taxpayer as to how to structure its business arrangements. A determination that a controlled transaction is not commercially rational must therefore be made with great caution;

in assessing the commerciality of a transaction that is part of a broader overall arrangement, it is important not to examine the transaction in isolation, but to look at the totality of the arrangements to determine whether the terms make commercial sense for the parties;

it is not sufficient from a transfer pricing perspective that an arrangement make commercial sense for the group as a whole: the transaction must be arm’s length at the level of each individual taxpayer.

Both business cycles and inter company transactions should be described and documented. The MF is the common denominator Smaller or country specific transactions are typically addressed in Country File

Business cycle

Transactions

Control Framework

For TP purposes, a business control framework should be based on relevant responsibility profiles; e.g. cost centre, profit centre, etc.

Responsibility centres should be linked to a TP policy per division with relevant benchmarks of I/C transactions

Testing is key to ensure adherence to the outcome of the benchmarking studies. Policy decisions to be made; e.g. Does a country has to be ‘at arm’s length each year?

Testing to what extent the MNE is ‘in control’

Business Control Framework

Design and Implementation TCF

Testing TCF

Output

Determination of potential risks, determine to what degree the MNE is ‘in control’ including materiality test

Positions for the tax returns are being taken. In case not ‘in control’ and ‘material’, (local) tax authority is involved with a suggestion how to deal with specific issues

Loss of knowledge due to time lag of audit procedures (change of personnel, change of operating concepts, etc.); this concerns HQ in particular

-> Contemporary documentation is not a legal requirement, but an operating necessity !

HQ can usually provide a lot of answers, but can they be used readily ? Get knowledge from local units who often feature more continuity and can provide more information; but: no complete overview on extra-ordinary transactions!

• Transfer pricing, in particular in relation to the shifting of risk and intangibles, the artificial splitting of ownership of assets between group legal entities, and group transactions that would rarely take place between independent entities

The effectiveness of anti-avoidance measures such as GAARs, CFC regimes, thin capitalization rules, and rules to prevent treaty abuse

The availability of harmful preferential regimes

The report indicates that the OECD intends to develop an initial comprehensive action plan to be finalized in June 2013.

The Report then notes that globalization has made it possible for businesses to locate many

productive activities in geographic locations that are distant from the physical locations of their customers

Call for further information exchange between tax authorities

Apart from double taxation, there are also instances of ‘double non-taxation’

Transfer pricing strategies that involve the shifting of functions, assets and risks (and therefore income) from high-tax to low-tax jurisdictions are also discussed, as are strategies to escape the application of general anti-avoidance rules

The report calls for multinational effort to address BEPS concerns, noting that unilateral actions could lead to further mismatches, additional disputes, increased uncertainty, or a “race to the bottom” with respect to corporate income taxes

The Report proposes that action be taken to address these problems, first by developing a